Rambus Inc. Form 10-Q Summary
Business Context and Reporting Period
Rambus is an intellectual-property licensing company focused primarily on semiconductor chip-interface technologies, with an expanding lighting and display technology business. The filing covers the quarter and six months ended June 30, 2010, compared with the corresponding 2009 periods. The company had 112.0 million common shares outstanding at June 30, 2010.
Key Financial Metrics
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
|---|---|---|---|---|
| Total revenue | $38.9 million | $27.0 million | $200.7 million | $54.3 million |
| Royalty revenue | $38.2 million | $24.8 million | $198.7 million | $50.9 million |
| Contract revenue | $0.7 million | $2.2 million | $2.0 million | $3.4 million |
| Operating income (loss) | $(6.7) million | $(22.3) million | $195.5 million | $(38.5) million |
| Net income (loss) | $(12.5) million | $(24.0) million | $138.4 million | $(41.4) million |
| Diluted income (loss) per share | $(0.11) | $(0.23) | $1.18 | $(0.40) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $176.4 million | $(18.3) million |
Computed gross margin was approximately 95.4% for the second quarter and 98.2% for the first six months, based on reported revenue and cost of revenue. Operating margin was negative 17.2% for the quarter and 97.4% for the six-month period, reflecting the substantial Samsung-related revenue and settlement gain.
- At June 30, 2010, cash and cash equivalents were $334.5 million, marketable securities were $263.1 million, and total cash, cash equivalents and marketable securities were $597.6 million, up from $460.2 million at December 31, 2009.
- Total assets were $697.4 million and total liabilities were $183.3 million at June 30, 2010.
- Convertible debt principal was $172.5 million, consisting of 5% convertible senior notes due June 2014; the carrying value was $116.2 million after the unamortized discount.
- The company repaid approximately $137.0 million of zero-coupon notes upon maturity in February 2010.
- Cash used in investing activities was $99.1 million, primarily reflecting purchases of marketable securities. Cash used in financing activities was $31.9 million.
- The company repurchased approximately 4.2 million shares for $95.3 million during the first six months and had authorization remaining for approximately 10.5 million shares.
Material Changes Versus the Prior Comparable Period
- Revenue increased 44.0% in the second quarter and 269.5% for the first six months, primarily due to the Samsung settlement and license arrangement.
- Royalty revenue increased 54.3% in the quarter and 290.2% for the first six months. Contract revenue declined 69.9% and 41.2%, respectively, largely because a prior-year industry-standard interface contract was completed.
- Research and development expense increased 46.3% in the quarter and 33.2% for the first six months, mainly because of increased headcount and activities in the newly established lighting and display technology group.
- Marketing, general and administrative expense declined 9.7% in the quarter and 12.6% for the first six months, primarily because of lower litigation expense.
- The company recorded $10.3 million of settlement gain in the second quarter and $106.2 million for the first six months; no comparable gain was recorded in 2009.
- Interest and other expense, net increased to $3.4 million in the quarter and $9.0 million for the first six months, partly due to the 2014 convertible notes and debt-discount amortization.
- Income taxes were $2.4 million in the quarter and $48.1 million for the first six months, principally reflecting Korean withholding taxes and state alternative minimum taxes associated with Samsung payments.
Guidance, Outlook, Risks and Unusual Items
- Under the January 2010 Samsung settlement, Samsung paid $450.0 million through June 30, 2010 and is expected to pay approximately $450.0 million more through 2014, generally in quarterly payments of approximately $25.0 million, subject to contractual adjustments.
- The Samsung arrangement included a five-year license, settlement of litigation and issuance of approximately 9.6 million shares. Samsung has a one-time put right for up to 4.8 million shares at an aggregate price of up to $100.0 million, exercisable during a specified period beginning 18 months after the transaction.
- Management stated that existing cash, investments and expected operating cash flow should be adequate for operations, capital expenditures and commitments for at least the next 12 months.
- Management expects engineering and research expenses to remain elevated due to the lighting and display group, technology investments, incentive compensation and the Samsung-related bonus. Litigation expenses are expected to remain significant, volatile and difficult to predict.
- Revenue remains highly concentrated: the top five licensees represented approximately 83% of second-quarter revenue and 91% of first-half revenue. Samsung accounted for at least 10% of first-half revenue.
- Several significant license agreements were expiring or subject to renewal negotiations in 2010. Failure to renew on acceptable terms could reduce royalty revenue.
- The semiconductor industry remains cyclical and competitive, while licensee shipment volumes, pricing and product mix make royalty revenue difficult to forecast. International customers represented approximately 87% of second-quarter revenue and 95% of first-half revenue.
- Major litigation remained pending, including matters involving Hynix, Micron, NVIDIA and other parties. The Federal Circuit scheduled rehearing of coordinated Hynix and Micron appeals for October 2010. The filing also reports that, on July 26, 2010, the ITC issued an exclusion order and cease-and-desist order concerning certain NVIDIA products that infringe Rambus patents.
- The company recorded a $1.0 million second-quarter adjustment for incorrect amortization of the 2014 Notes’ debt discount and concluded that the correction was not material to prior or current periods.
- Contractual obligations totaled approximately $254.9 million, including $172.5 million of convertible-note principal, $34.1 million of note interest and $48.3 million of lease obligations. Uncertain tax benefits of approximately $10.6 million were excluded from this table.
Important Facts for Investors to Verify
- How much of first-half revenue and earnings was attributable to the Samsung settlement allocation versus recurring royalty activity.
- The timing, amount and collectability of remaining Samsung payments and the potential impact of Samsung’s share put right.
- Status and outcomes of license renewals, particularly agreements expiring during 2010, and the resulting effect on recurring royalty revenue.
- Developments in the Hynix, Micron, NVIDIA, ITC and other intellectual-property proceedings, including possible impacts on patent enforceability, royalties and litigation costs.
- The sustainability of cash generation after the Samsung-related receipts, share repurchases, debt repayment and elevated research and development spending.
- Progress and financial contribution of the lighting and display technology group and the GE Lighting license.
- Exposure to customer concentration, semiconductor-market cyclicality, counterparty credit risk and potential changes in tax liabilities or deferred-tax-asset valuation allowances.